Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Wednesday, March 5, 2008: Auction
Rate Preferreds -- see below. Tell your friends www.AuctionRatePreferreds.org
brings you to this site.
stockmarket continues its decline. As I said in November, the market is not
the place to be at present, except for occasional "punts" -- like
silver, gold, select mining stocks, and some commodities. This is what the market
has looked like since November -- a classic bear market:
How long will
this decline continue? I suspect it will decline for the rest of this year,
at the very least. Why?
is the talented and respected chairman of Morgan Stanley Asia. He wrote this
piece for today's New York Times:
turbulent credit markets and ever-weaker reports on the economy, the Federal
Reserve has been unusually swift and determined in its lowering of the overnight
lending rate. The White House and Congress have moved quickly as well, approving
rebates for families and tax breaks for businesses. And more monetary easing
from the Fed could well be on the way.
question for the economy is this: Will this medicine work? The same question
was asked repeatedly in Japan during its lost decade of the 1990s.
Unfortunately, as was the case in Japan, the answer may be no.
If the American
economy were entering a standard cyclical downturn, there would be good reason
to believe that a timely countercyclical stimulus like that devised by Washington
would be effective. But this is not a standard cyclical downturn. It is
a post-bubble recession.
The United States
is now going through its second post-bubble downturn in seven years. Yet this
one stands in sharp contrast to the post-bubble shakeout in the stock market
during 2000 and 2001. Back then, there was a collapse in business capital
spending, a sector that peaked at only 13 percent of real gross domestic product.
recession has been set off by the simultaneous bursting of property and
credit bubbles. The unwinding of these excesses is likely to exact a lasting
toll on both homebuilders and American consumers. Those two economic sectors
collectively peaked at 78 percent of gross domestic product, or fully
six times the share of the sector that pushed the country into recession
seven years ago.
bubble-prone economies, a cyclical recovery even when assisted by aggressive
monetary and fiscal accommodation isnt a given. Over the past
six years, income-short consumers made up for the weak increases in their
paychecks by extracting equity from the housing bubble through cut-rate borrowing
that was subsidized by the credit bubble. That game is now over.
may not be able to arrest this post-bubble downturn. Interest rate cuts are
unlikely to halt the decline in nationwide home prices. Given the outsize
imbalance between supply and demand for new homes, housing prices may need
to fall an additional 20 percent to clear the market.
rate cuts have not done much to contain the lethal contagion spreading in
credit and capital markets. Now that their houses are worth less and loans
are harder to come by, hard-pressed consumers are unlikely to be helped by
lower interest rates.
experience demonstrates how difficult it may be for traditional policies to
ignite recovery after a bubble. In the early 1990s, Japans property
and stock market bubbles burst. That implosion was worsened by a banking crisis
and excess corporate debt. Nearly 20 years later, Japan is still struggling.
There are eerie
similarities between the United States now and Japan then. The Bank of Japan
ran an excessively accommodative monetary policy for most of the 1980s. In
the United States, the Federal Reserve did the same thing beginning in the
late 1990s. In both cases, loose money fueled liquidity booms that led
to major bubbles.
central bank initially denied the perils caused by the bubbles. Similarly,
its hard to forget the Feds blasé approach to the asset
bubbles of the past decade, especially as the subprime mortgage crisis exploded
In Japan, a
banking crisis constricted lending for years. In the United States, a full-blown
credit crisis could do the same.
of excessive corporate indebtedness in Japan and a kereitsu culture
of companies buying one anothers equity shares put extraordinary pressures
on business spending. In America, an excess of household indebtedness could
put equally serious and lasting restrictions on consumer spending.
Like their counterparts
in Japan in the 1990s, American authorities may be deluding themselves into
believing they can forestall the endgame of post-bubble adjustments. Government
aid is being aimed, mistakenly, at maintaining unsustainably high rates of
personal consumption. Yet thats precisely what got the United States
into this mess in the first place pushing down the savings rate, fostering
a huge trade deficit and stretching consumers to take on an untenable amount
A more effective
strategy would be to try to tilt the economy away from consumption and toward
exports and long-needed investments in infrastructure.
be easy to achieve. Such a shift in the mix of the economy will require export-friendly
measures like a weaker dollar and increased consumption by the rest of the
world, which would strengthen demand for American-made goods. Fiscal initiatives
should be directed at laying the groundwork for future growth, especially
by upgrading the nations antiquated highways, bridges and ports.
not to say Washington shouldnt help the innocent victims of the bubbles
aftermath especially lower- and middle-income families. But the emphasis
should be on providing income support for those who have been blindsided by
this credit crisis rather than on rekindling excess spending by overextended
on exports and on infrastructure spending, we might be able to limit the recession.
Such an approach might also set the stage for a more balanced and sustainable
economic upturn in the next cycle. A stimulus package aimed at exports and
infrastructure investment would be an important step in that direction.
and potentially most relevant, lesson to take from Japans economy in
the 1990s was that the interplay between financial and real economic bubbles
causes serious damage. An equally lethal interplay between the bursting of
housing and credit bubbles is now at work in the United States.
especially Federal Reserve officials, harbor the mistaken belief that swift
action can forestall a Japan-like collapse. The greater imperative is to avoid
toxic asset bubbles in the first place. Steeped in denial and engulfed by
election-year myopia, Washington remains oblivious of the dangers ahead.
on Auction Rate Preferreds (ARPS): Everyone keeps intoning that it's
a liquidity issue, not a credit one. That means in English there's good asset
backing for your ARPS. You just can't sell them.
Wall Street has
truly surpassed itself with this mess.
Vance speaks the same unhelpful nonsense on ARPS.
Eaton Vance had a conference call yesterday
on auction rate preferreds (ARPS). Summary:
No quick fix.
Who knows how long it will take. Maybe forever.
Can't "deleverage" (i.e. sell muni bonds and redeem ARPS) since that
would hurt Eaton Vance equity owners. This would not be a "win-win"
There is no secondary market for ARPS. Hence you can't sell your holdings. ("And
we don't care if one is ever developed" was the impression Eaton Vance
5. Eaton Vance
management is working hard. Why, one day, they even worked "well into the
evening." (I kid you not. They actually said this.)
6. They're working
to get money market funds to be able to buy ARPS. Need laws and rules changed.
Sounds like a long shot, to me.
7. They gave no
deadlines, no time frames. Only definite thing: another conference call next
Eaton Vance management hasn't yet got the message their future is at stake.
No one will ever deal with Eaton Vance again if they don't resolve this issue.
You can listen
to a replay of the conference on 1-800-642-1687. Access code 37152796.
You won't be impressed.
Get your broker to write Eaton Vance chairman and CEO, Thomas E. Faust,
Jr. and explain that your broker won't ever do business again with Eaton
Vance if Faust doesn't fix the auction rate preferreds disaster. This is Mr.
Faust. He looks caring.
Mr. Faust (email@example.com)
was not on yesterday's conference call. He should have been. Faust's phone number
is 800-225-6265 ext 8201. His executive assistant is Kelly Creedon. Eaton Vance's
address is 255 State Street, Boston, MA 02109.
Bond Failures Approach 70%, Show No Sign of Easing. Bloomberg's
Michael McDonald has a excellent piece today with this heading today. The story
is about single issuer munis -- e.g. The Rady Children's Hospital in San Diego
and the New York Dormitory Authority. Click
You can now reach this site by punching in
Jews and $100 a barrel oil
Moses to God; "Just let me get this straight. They get the oil
and we get to cut off half our what?"
Jewish New Year 5768.
Chinese New Year 4706.
Hence, 1062 is number of years the Jewish nation waited for Chinese food.
Man emerges from ashes, spies woman, hands her an apple.
"Would you like a bite?"he asks.
she replies, "let's not start this nonsense again.
He: "You never tell me when you have an orgasm."
She: "You're never there."
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
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reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
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